In the recent court hearing on January 17, there was a significant development in the legal battle between the United States Securities and Exchange Commission (SEC) and Coinbase, the prominent cryptocurrency exchange based in the country. The platform vigorously argued that the tokens traded on its platform should not be considered securities, a stance that could have a positive impact on the entire crypto community if the case is resolved in favor of the exchange.
The SEC filed a lawsuit against Coinbase in June of last year, alleging that the exchange facilitated the trading of various crypto tokens that should have been registered as securities. Among the accusations, the SEC pointed out that Coinbase was operating illegally as a national securities exchange, broker, and clearing agency without registering with the regulatory body. A specific point of contention was Coinbase’s “staking” program, allowing users to pool assets to verify activity on blockchain networks and receive rewards.
I’m not going to live tweet the entire @SECGov/@coinbase hearing but Judge Failla is on fire right out of the gate.
She says to the @SECGov lead lawyer, and I paraphrase: The “DeFi people” gave a “really fine” amicus brief explaining what staking is and what the wallet is used…
— Eleanor Terrett (@EleanorTerrett) January 17, 2024
During the hearing, Judge Failla showed significant interest in the case and appeared to lean towards Coinbase. The judge notably praised an amicus intervention report submitted by the decentralized finance (DeFi) community, highlighting its superior explanation of staking and wallet usage compared to the SEC’s report.
In a significant exchange, the SEC lawyer referred to the tokens in question as “computer code,” which raised skepticism from Judge Failla about the SEC’s position and purpose in pursuing the case. The judge questioned the SEC’s failure to present an opposing narrative regarding the legal foundations of the Howey test, essential for determining if an investment qualifies as a security.
Positive Hearing for Coinbase: The Exchange Demonstrated Stronger Arguments Than the SEC
The discussion also addressed the risks associated with staking on Coinbase, and Judge Failla expressed concerns about the SEC’s broad definition of securities and its potential implications for purchasers of the tokens involved in the case. The question was raised of whether purchasers would have the right of rescission if the tokens were deemed securities, to which the SEC lawyer responded affirmatively.
As the hearing progressed, it delved into the topic of collectibles, with Judge Failla expressing caution about implicating commodities or other non-security assets. The SEC defended its position by distinguishing between tokens and collectibles based on the enterprise or network associated with the tokens, emphasizing that the token acts as the “gateway” to the network.
The outcome of the hearing remains uncertain, but Judge Failla’s questioning stance and skepticism toward the SEC’s arguments could indicate a potentially favorable shift for Coinbase. The implications of this case go beyond the involved parties, as it could set a significant precedent for the regulation and classification of cryptocurrencies as securities in the United States.
